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Arena Economics, 101

16 Aug

Last September,  I received an email from Darcy Norman, an Honours Economics graduate from the University of Alberta. Darcy was in his last year at the UofA at the time, and had completed his honours thesis, under the supervision of Professor Brad Humphreys, on the issue of public subsidies and sports stadiums. More specifically, he wrote a literature survey on the public subsidy of sports stadiums in an Edmonton context. The scope and thrust of his essay, Do Citizens Gain from a Publicly Subsidized Stadium?, is as follows:

“Academics have expended much brainpower on the question of the benefits of publicly funded stadia. This essay will reveal that it is generally a bad idea for the public to finance such ventures. This thesis will be examined from the viewpoint of three different citizen groups: taxpayers concerned with the economic costs of the arena, taxpayers concerned with the aura, prestige and vitality of the city and taxpayers concerned with their enjoyment of the sports team.”

Darcy suggested that his paper “might make for a good introduction to the less academically inclined as to what is pretty much a consensus in academia: subsidizing sports arenas is a bad idea.” I could not agree more. Darcy’s essay is a fantastic primer on the issue of arena economics. It is highly accessible and very easy to read. It took me about 30 minutes, and at no time was I confused or slapped silly with formulas and tables. Yet the logical clarity, the evidence and the links to further studies are all there. Most importantly, it is written with knowledge of the debate in Edmonton, and addresses some of the claims that have been made by pro-arena advocates in the city. With Darcy’s permission, I’m going to post the essay in the “Resources” section of the site. I really encourage anyone who is interested in this issue to have a look at Darcy’s paper.

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On Columbus, Pt. 2

5 Aug

Now Give Me Money (That’s What I Want)

There are two other things to keep in mind in all of this discussion about Columbus. The first is that the arena district that Staples writes about, and that the Katz Group frequently uses as a model for an arena district in Edmonton, was paid for through private investment. It was not publicly funded. Through referendums, voters in Columbus repeatedly rejected the use of taxpayer dollars, so the Nationwide Mutual Insurance Company built the district mostly by itself, and Blue Jackets owner John H. McConnell agreed to lease the arena from Nationwide.  The man who was to be a co-owner of the franchise with McConnell, Lamar Hunt, backed out when voters refused to finance an arena using taxpayer dollars.

Secondly, despite voter rejection of major public investment in the district ten years ago, the Blue Jackets are now asking the City of Columbus and Franklin County for a handout. Why? Because they claim to be losing $12 million dollars a year. Nationwide owns the arena and is charging the Blue Jackets rent, keeping some revenues for themselves, and of course the team is perennially bad and has only made the playoffs once in its ten years in the league. They also aren’t making enough money with the concerts they hold at Nationwide, losing $4 million a year in non-hockey related revenue. The Blue Jackets have asked for public money in a variety of forms, including having the city take over the arena and cutting them a deal on rent. The Columbus Chamber has even warned that the Blue Jackets might be forced into relocating their franchise if they can’t get financial help from taxpayers. Sound familiar?

Some might jump all over this news as proof that the Katz Group and the Oilers really do need the city to foot the bill and give them all the revenue from a new downtown arena. But to do that one has to admit two other realties: that things in Columbus aren’t as rosy and ideal as they are made out to be, and that the economics simply don’t work. And that last one, to use a sports metaphor, is the ballgame. The National Hockey League’s current business model is so bad one of its teams can’t even afford to pay the rent (and that isn’t even counting problems in Phoenix, Nashville, Tampa Bay, and Long Island). That team, the Columbus Blue Jackets, are the Columbus Arena District’s major tenant, and they say their hockey business is losing millions of dollars a year. Furthermore, even if they got a free pass on revenues recognized as hockey-related revenues (Nationwide has actually given them a break the last two years), they say they’d still be losing $4 million on the non-hockey revenue side. Yet their owners have expressed no interest in taking financial control of the arena, nor has Nationwide offered to buy the Blue Jackets (they have offered up the arena to the Blue Jackets for the low, low price of $55 million dollars). Two private businesses, then, are refusing to invest any more of their own money into the district, the arena and the hockey team. Why? Because they know the math doesn’t work, and rather than be accountable for the bad business decision they made 10 years ago, they want the taxpayers to bail out the Blue Jackets. But why should government take on the financial risk when two private business are proving that it’s a losing venture? Why should taxpayers be responsible for cleaning up the NHL’s mess? And what kind of precedent does it set for future handouts when government eats the costs for a private business gone bad? Columbus is often identified as the ideal case, the exemplar of arena redevelopment, and yet the real lesson of Columbus, just like everywhere else, is that sports arenas are financial sinkholes. Governments should therefore treat the idea of funding them like they’re being asked to join the Mob. Think really, really hard about it, because once you’re in, you’re never getting out.

On Columbus, Pt. 1

4 Aug

Stay Puff

In November of ’09, David Staples of the Edmonton Journal wrote a four-part series on the downtown arena, with a specific focus on the “success” of arena projects in Columbus and Los Angeles. The pieces were mostly puff, full of anecdotal evidence from two of the only cities in North America where downtown redevelopment centered around sports facilities have been deemed even a moderate economic success (when asked on Twitter why he hadn’t visited any other cities besides these two, Staples said that he went to the two places mentioned in the Arena Feasibility Committee Report. If only the Katz Group’s PR work was always that easy). But in the first article in the series, Staples also referenced a paper about Nationwide Arena in Columbus, written by Brad Humphreys and Xia Feng. Humphreys is a professor of economics at the University of Alberta, and is renowned for his work in sports economics, particularly the economic effects of new stadiums and arenas. Many of his papers are in the resources section on this site. The Columbus paper was the type of hard analysis that isn’t present in most media stories about the economics of sports arenas, and because it did an increase in residential property values around Nationwide Arena, Staples went back to the well with it repeatedly throughout his series. Unfortunately, he overstated the results in Humphreys’ paper, and glossed over some important facts. These include:

1) The paper was neither new nor revelatory. It had been publicly available since 2008. In fact, Humphreys referred to the paper in an interview I did with him back in February of 2008, and it was debated in the comments then whether the higher property value argument had any merit (more on this later).

2) The paper was a working paper. It had not been subject to the peer review process, an essential step in the validation of any academic work. Professor Humphreys’ methodology and conclusions have not been screened and looked over by the people who understand these issues best: his colleagues.

3) The paper did conclude that residential property values were higher in proximity to Nationwide Arena, but it also included a great big, giant caveat that they could not determine how much of that was due to the arena and how much was due to the fact that the arena was downtown.

4) The paper did not take into account the 75-100% property tax abatement provided by the City of Columbus to encourage people to live downtown (Nationwide Arena received a 99% tax abatement).

5) A similar study Humphreys cites in his paper found no effect on property values from the new football stadium in Dallas.

6) A simple calculation shows that even if the increase in property values was a result of the new arena, it was not enough to offset the cost of the facilities.

Staples also referenced a study by the John Glenn School of Public Affairs at (The) Ohio State University, which reported that property values in the Columbus arena district had shot up by 267% in ten years. Scott Hennig at the Canadian Taxpayers Federation has already scrutinized the findings, but I’ll add that Staples failed to mention that the study was paid for by the Columbus Blue Jackets and the owners of the arena district, Nationwide Realty Investors. Not really a surprise, then, that the result of the study saw the arena district as having a positive economic effect on the region.

It Doesn’t Really Matter

In one of the accompanying pieces, Staples wrote a line that immediately stood out to me and some fellow arena news watchers:

“The increased property values in Columbus can be translated into increased taxes for the city, Humphreys says.”

The reason it stood out for us was that it was an issue that had come up in the interview I did with Professor Humphreys in February of 2008. In the comments, there was a question raised about whether or not it was the case in Alberta that an increase in property values would mean more tax revenue for a city. The general consensus was that an increase in property values doesn’t lead to more tax revenue for the City of Edmonton. It just means that the distribution of taxes between properties will change. I asked Scott Hennig of the Canadian Taxpayers Federation to explain why an increase in property values doesn’t lead to any extra money for the City of Edmonton. This is his response:

1) If a certain area magically becomes more desirable and property values go up, it should have an equal reduction in another area, based solely on the fact that unless the incomes of the people change, the ability to purchase property stays the same. If this wasn’t the case, every house in Edmonton would be the size and price of Katz’s. I get this might not be immediately clear, but there’s a reason why not every house in Edmonton is a mansion or a little shack. The distribution of income across the population is not even, and therefore their desire and ability to purchase homes isn’t the same. There is only a certain percentage of the population that will want and be able to purchase housing at say the $700,000 level. If the supply of $700,000 houses go up, while the demand stays the same, those houses will either sit empty or be decreased in price. Or if everyone who lives in Riverbend moves to an arena district, it’s likely that the houses in Riverbend will have to be decreased in price to find buyers. Therefore, there should be no change in overall property value in the city.

2) Even if I’m incorrect about #1 and there is an overall increase in the market value of property in the City of Edmonton (more rich people move in than any other income level), the way that property taxes are set and collected would prevent an increase in revenue. Unlike the federal and provincial governments, who set their tax rate first and then just collect whatever money comes in (and if incomes do increase, or employment goes up they collect more money than expected) the city decides first how much money they want to collect, check what the assessment is, and then they set the tax rate. So, if they decide they are going to collect an extra $40 million, they just divide that by the total assessment and set the mill rate. That combination of the rate and the assessment will dictate your portion of that $40 million. So, those people with a higher assessment will pay more than those with a lower assessment. In the end, the city doesn’t collect any more money, just some people pay more than they did before, and some people pay less.  Or in reality, some people see an even larger tax hike than they expected, while others see a slightly lower tax hike than they expected.

This really doesn’t change much for businesses.  I just use houses as an example that most people can wrap their head around.  But the same goes for businesses.

You can’t, therefore, make an argument that the City should invest tax dollars into an arena because it will get more money back from an increase in property taxes. It won’t, because an increase in property values in one part of the city leads to a decrease in property values in another party of the city, and because the City of Edmonton doesn’t collect property taxes in the same way as Columbus, Los Angeles, or any other American city.

Doubleplusungood

2 Aug

The public sector isn’t paying for it. The fact of the matter is it’s a $400-million arena. [Oilers owner Daryl] Katz is putting in $100-million. That leaves $300-million. We’ll come up with some sort of a package for a ticket tax, which is probably another $120- to $125-million. That’s generated from people who use the facility — a user fee, which is not, I don’t think, unreasonable.”

Mayor Stephen Mandel

Bold is mine.

Call it dumb, delusional or intentionally deceptive, but the one thing you definitely can’t call Mayor Stephen Mandel’s recent statement to the National Post is accurate (I’m going with a dab of the delusional spread across a big misdirect sandwich). Even the math in his own quote leaves around $175-180 million to be covered by someone not named Daryl Katz. We could give Mayor Mandel the benefit of the doubt and expect the Tooth Fairy to cover the remainder of the bill, or we could look at the following tidbits and draw a more logical conclusion:

  • The Katz Group sat in Council chambers a mere eleven days ago and said that a 100% private financing model was not a viable economic option, and that they wanted to arrange a deal with the City, one where the City would help finance the arena, own the arena, and then let the Katz Group collect all the revenues from the arena
  • City Council has since come up with 140 questions for city administration, the Katz Group and Northlands, and they all seem pretty clear on the idea that the Katz Group is looking for public investment
  • City administration, the Katz Group and the Mayor himself have all advocated using a tax known as a Community Revitalization Levy to help pay for the arena
  • Substantial public subsidy, including the CRL, was also recommended in City Shaping, the report that was commissioned by the Mayor and City Council
  • At this point, the City looks to be in charge of collecting revenue from both the ticket surcharge and the personal seat licensing, with no explanation as to who will make up for any revenue shortcomings if those two plans don’t work. Considering the Katz Group is unwilling to cover the shortfall if either the CRL or downtown development don’t go as intended, I think it’s unlikely that they’ll agree to be on the hook if the user-pay ideas don’t pan out
  • The Katz Group requested that the City join them in asking both the Federal and Provincial government for infrastructure funding
  • The City has already spent “less than $100,000″ of taxpayer dollars on the City Shaping document
  • The City already subsidizes the Oilers to the tune of several million dollars a year, providing them cheap rent ($1 a year), concession revenues, parking revenues, ticket surcharge revenue, ownership of the naming rights for the building, and a free ride on property taxes.

So to summarize: existing subsidies and opportunity costs associated with the current Rexall Place, public expenditures to build the new facility and surrounding infrastructure, public ownership of the new facility, public risk and exposure on the CRL and user-pay ideas, opportunity costs from the turning over of revenues from a city-owned and paid-for facility, opportunity costs from the CRL and the direction of taxes towards the arena, and new taxes to cover the mandatory redirection of taxes from the CRL to the arena. If that isn’t public sector involvement and financing, I don’t know what is.

Mayor Mandel has done this type of…let’s call it meandering with language…before, not only on the question of spending tax dollars to finance the arena, but also on the question of whether or not he wanted it located downtown. So it’s clear that the best way to get him to say something different from what he’s said before is to ask him the exact same question. But I don’t get why he’s continuing with this particular line of spin, since about 200 people sat in Council chambers two Wednesdays ago and heard the Katz Group say the only way they could finance a new building was by using public dollars, and the only reason there was a meeting in the first place is that the use of public dollars and public sector involvement are on the table. It does, however, reinforce the fact that, despite the public opinion and independent economic research that point in the other direction, the Mayor is still stubbornly in favour of a publicly-funded downtown arena. I’d also argue that it reinforces how disingenuous he has been throughout this entire process, and that he should be held to account for it in October, but that’s a whole other post and a whole other story.